REG - AO World plc - Interim Results
21/11/2023 07:00
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RNS Number : 0582U AO World plc 21 November 2023
21 November 2023
AO WORLD PLC
INTERIM RESULTS FOR THE 6 MONTHS ENDED 30 SEPTEMBER 2023
STRATEGIC PIVOT PROGRESS CONTINUES AND PROFIT GUIDANCE UPGRADED
AO World PLC ("the Group" or "AO"), the UK's most trusted electrical retailer,
today announces its unaudited financial results(1) for the six months ended 30
September 2023 ("HY24").
The first six months to September 2023 saw the continued delivery of profit
and cash generation. As a result, we are upgrading our profit before tax
guidance for FY24 to between £28-33m.
£m(1) HY24 HY23 Mvmt
Revenue 482 546 (12%)
Adjusted EBITDA(2) 27 9 205%
Operating profit/ (loss) 15 (9) NM%(8)
Profit / (loss) before tax 13 (12) NM%
Basic earnings/ (loss) per share 1.64 (2.14) NM%
Net funds/ (debt) 16 (19) NM%
Highlights
· Step change in profitability year-on-year as we continue to
deliver on our strategic pivot to profit and cash
· Statutory profit before tax of £13m (HY23: £(12)m). Gross
margin has improved to 23.5% (HY23: 19.5%) as a result of decisive action:
o Removing unprofitable sales as well as the introduction of delivery
charges on all deliveries.
o Advertising and Marketing costs have been tightly controlled with a change
in focus of spending from acquisition to brand investment.
o Warehousing costs have fallen to £25.5m (HY23: £31.3m) or to 5.3% of
sales (HY23: 5.7%). Operational efficiencies and annualisation of property
rationalisation, offset by inflationary increases in wages.
o Other admin costs have decreased by £9.4m to £56m. Tight control over
ongoing spend has helped offset inflationary pressures.
o The overall mobile market has declined in the year, which has negatively
impacted the Group's ability to hit network volume targets set for the
calendar year 2023. This will have an overall single digit millions profit
drag in FY24 and this is absorbed within the upgrade today.
· Adjusted EBITDA of £27m (HY23: £9m), achieving an adjusted
EBITDA margin of 5.6% (HY23: 1.6%)
· Improved cash generation in the period leading to overall
liquidity(3) of £99m (31 March 2023: £89m: 30 September 2022): £68m and net
funds(4) of £16m (31 March 2023: £4m: 30 September 2022: net debt £19m)
· Revenue decreased by 12% as expected as we continue to annualise
the actions taken to remove non-core channels and unprofitable sales, and
increase gross margins.
· Over 290,000 new customers(5) experienced the AO Way during the
period with an increase in the repeat customer purchase percentage rate.
· Customer satisfaction scores remain outstanding: Trustpilot
reviews have grown to over 440,000 averaging 4.7 out of 5 stars - continuing
to position AO as the UK's most trusted electrical retailer.
· Focus on branded advertising has increased spontaneous brand
awareness by about 10% YoY.
Outlook
Our previous FY24 guidance in July was for PBT around £28m(9.) Whilst mindful
of the ongoing cost of living crisis and geopolitical events that give rise to
uncertainty and volatility, we continue to optimise for profit outturn and are
increasing our profit before tax expectations to between £28m and £33m for
the full year. We now expect FY24 revenue to be around -10% YOY.
We will continue to invest prudently in the business and seize the significant
market opportunities that we see in front of us, with our growing and loyal
customer base.
Our medium-term ambitions remain unchanged:
· Annual revenue growth in a corridor of 10 -20%
· PBT margin 3 - 5%
· Profit converting to cash
Longer-term, our addressable market in the UK is significant as it currently
stands at c£27.6bn(6), and in order to take advantage of this we will look to
deepen our presence in categories such as televisions, laptops, audio visual
and small domestic appliances ("SDA"). The online segment of the market in
those categories remains a key opportunity for us as the long-term structural
migration to online retailing continues.
AO's Founder and Chief Executive, John Roberts, said: "I am very pleased with
the clear progress that we are making as a result of our strategic pivot to
focusing on profit and cash. We have generated more profit in the first half
of this year than we did in the whole of last year, and are also upgrading our
profit expectations for the remainder of FY24.
"As we anticipated, sales have reduced year on year as we continue to
annualise the actions that we've taken to remove non-core channels and
unprofitable sales from the business. However, we expect to end the year
having returned to run rate revenue growth.
"Our core fundamentals are in great shape and our service to customers has
never been better. Our Trustpilot scores continue to be the best in the
market, our spontaneous brand awareness is at record levels, and our
transacted customer base now stands at 11.6m people.
"As ever, I'm grateful to our manufacturer partners for their continued
support and of course to the fantastic AO team who continue to be magical in
the moments that matter for customers while maintaining the discipline and
focus needed to deliver our plan.
"We look forward with cautious optimism, given the macro challenges, as we
turn our attention back to delivering profitable revenue growth to drive our
operational gearing."
Enquiries
AO World PLC Tel: +44(0)1204 672 400
John Roberts, Founder & CEO ir@ao.com (mailto:ir@ao.com)
Mark Higgins, CFO
Powerscourt Tel: +44(0) 20 7250 1446
Rob Greening ao@powerscourt-group.com (mailto:ao@powerscourt-group.com)
Nick Hayns
Elizabeth Kittle
Webcast details
An in-person results presentation and Q&A will be held for analysts and
investors at 09:00 GMT with registration opening at 08:30 GMT today, 21
November 2023 at our London Creative Hub. Advance registration, prior to
arrival, is required by emailing ao@powerscourt-group.com. A playback of the
presentation will be available on AO World's corporate website at
www.ao-world.com in the afternoon.
About AO
AO World PLC, headquartered in Bolton and listed on the London Stock
Exchange, is the UK's most trusted major electricals retailer, with a mission
to be the destination for electricals. Our strategy is to create value by
offering our customers brilliant customer service and making AO the
destination for everything they need, in the simplest and easiest way, when
buying electricals. We offer major and small domestic appliances and a
growing range of mobile phones, AV, consumer electricals and laptops. We also
provide ancillary services such as the installation of new and collection of
old products and offer product protection plans and customer finance. AO
Business serves the B2B market in the UK, providing electricals and
installation services at scale. AO also has a WEEE processing facility,
ensuring customers' electronic waste is dealt with responsibly.
______________________________
(1) Unless otherwise stated all numbers relate to the continuing operations of
the Group and therefore exclude the impact of Germany. Refer to note 11 for
further details.
(2) Adjusted EBITDA is defined as Profit/ (Loss) before interest, tax,
depreciation, amortisation, profit/ (loss) on disposal of fixed assets,
impairment of assets and Adjusting items (see page 8).
(3) Liquidity is the total of cash and cash equivalents and the remaining
availability on the revolving credit facility.
(4) Net funds is defined as cash less borrowings less owned asset lease
Liabilities but excluding right of use asset lease liabilities.
Net funds also includes any cash overdrafts and owned asset lease
Liabilities in Germany.
(5) A customer is defined as an individual customer who has purchased via
ao.com.
(6) Total electricals market data from GfK, for the 12 months to 2 April 2023.
AO's value is from company data, net value.
(7) GfK data for FY24. AO's value is from company data.
(8) Where comparison change is a swing from negative to positive, this is
judged to be a non-meaningful ("NM") comparison.
(9) Guidance was for 2.5% PBT on sales of c£1.1bn
Cautionary statement
This announcement may contain certain forward-looking statements (including
beliefs or opinions) with respect to the operations, performance and financial
condition of the Group. These statements are made in good faith and are based
on current expectations or beliefs, as well as assumptions about future
events. By their nature, future events and circumstances can cause results and
developments to differ materially from those anticipated. Except as is
required by the Listing Rules, Disclosure Guidance and Transparency Rules and
applicable laws, no undertaking is given to update the forward-looking
statements contained in this document, whether as a result of new information,
future events or otherwise. Nothing in this document should be construed as a
profit forecast or an invitation to deal in the securities of the Company.
This announcement has been prepared for the Group as a whole and therefore
gives greater emphasis to those matters which are significant to AO World PLC
and its subsidiary undertakings when viewed as a whole.
CHIEF EXECUTIVE'S REVIEW
The first half of the year has seen the business continue to deliver on the
changes from our pivot to profit, and we have continued to join the business
up in order to drive further efficiencies.
UK inflation has remained high relative to the last 40 years and, combined
with continuing global economic uncertainty, this has served to create a
challenging environment in the UK and for retail consumers, specifically.
However, we have an in-built resilience because of our more affluent customers
base and the fact that 81% of our sales are MDA with the majority coming from
distress purchases; consequently, we remain cautiously positive. We are
focused on driving our model through a lens of profitability and cash
generation whilst maintaining our world-class service and being magical in the
moments that really matter for our customers.
AO has 16.4%(7) of the total major domestic appliance ("MDA") market and
29.6%(7) of the online MDA market, with the reductions noted in the period
resulting from proactive decisions that we have made to deliver profit and
cash generative sales. Against that backdrop, it is also worth noting that in
the last year the total MDA market has declined by 2%(7).
As we annualise our pivot to profit and cash, it is clear that the strategy is
delivering. We generated more profit in the first six months of this financial
year than we did in the whole of FY23. As we head into H2, we will continue to
focus on actions that continue to generate profit whilst also exploring
avenues for revenue growth.
FINANCIAL REVIEW
Unless otherwise stated, the below relates to continuing operations in the UK
only.
Revenue
£m 6 months ended 6 months ended % change
30 September 2023 30 September 2022
Product revenue 370.3 432.5 (14.4%)
Service revenue 30.4 23.3 30.5%
Commission revenue 56.7 65.9 (14.1%)
Third-party logistics revenue 13.2 12.9 2.8%
Recycling revenue 11.1 11.7 (5.4%)
481.7 546.3 (11.8%)
For the six months ended 30 September 2023, UK revenue decreased 11.8% to
£481.7m (HY23: £546.3m).
Product revenue
Product revenue, comprising sales generated from ao.com, marketplaces and
third-party websites, decreased 14.4%. In the short term the business
continues to annualise actions taken to improve margin and profitability as
part of the strategic pivot. The total MDA market value has seen a decline of
2%, which has further contributed to the decline in revenue. We continue to
review our product range and look for category expansion opportunities that
contribute further to our profitability.
Service revenue
Service revenue, which includes delivery and customer installation services,
increased by 30.5% reflecting the annualisation of the introduction of
delivery charges for all deliveries.
Commission revenue
Commission revenue includes commissions generated by network connections in
our Mobile business and from the promotion of AO Care warranties for Domestic
and General. Commissions from the sale of warranties decreased in line with
product sales. The Mobile industry has seen a significant decline, with the
Contract Handset Acquisition Market declining by c13% on a LFL basis for the
past six months of trading. Connections have fallen as a result of market
conditions; this has been partly offset with improvements in the average life
of new contracts and the impact of some RPI increases but has resulted in
losses in our Mobile business.
Third-Party Logistics revenue
Our expertise in complex two-person delivery is highly valued in our industry,
and we undertake a number of deliveries on behalf of Third Party clients in
the UK. Revenue in this area grew by 2.8% and delivers incremental
profitability. We will continue to maximise this revenue opportunity to
leverage our operational gearing, without it distracting from our core
business.
Recycling revenue
Recycling revenue has decreased by £0.6m as a result of a reduction in
processed volumes and a reduction in output material prices due to market
forces.
Gross margin
6 months ended 6 months ended % change
£m 30 September 2023 30 September 2022
Gross profit 113.0 106.5 6.2%
Gross margin 23.5% 19.5% 20.4%
Gross profit, including product margins, services and delivery costs,
increased by 6.2% to £113.0m (HY23: £106.5m). The actions that the business
has taken in the last 12-18 months to pivot to profit is contributing to this
large increase in gross margin. The actions taken in product pricing supported
by strong relationships with suppliers, the introduction of delivery charges
on all deliveries and our focus on profitable sales which fit our model have
contributed to this shift in gross margin. The mobile business, as noted
above, has had a negative impact on gross margin and is an area of focus for
the business in the second half of the financial year.
Selling, General & Administrative Expenses ("SG&A")
£m 6 months ended 6 months ended % change
30 September 2023 30 September 2022
Advertising and marketing 17.4 17.7 (1.9%)
% of revenue 3.6% 3.2%
Warehousing 25.5 31.3 (18.6%)
% of revenue 5.3% 5.7%
Other admin 56.0 65.4 (14.3%)
% of revenue 11.6% 12.0%
Adjusting items - 3.6 100.0 %
% of revenue - 0.7%
Administrative expenses 98.9 118.0 (16.2%)
% of revenue 20.5% 21.6%
SG&A costs have decreased YOY by 16.2%. As a percentage of revenue there
has been a decrease during the period from 21.6% to 20.5% as we continue to
look to maximise efficiencies and reduce our cost base in line with our
strategy of pivoting to profit and cash.
The majority of our advertising and marketing costs occur within our Retail
and Mobile businesses. As noted the Mobile industry has been highly
competitive in the year which has led to an increase in acquisition spend year
on year as attracting customers in a declining market has become less
efficient. In our Retail business we have continued to look to improve the
efficiency of acquisition spend such as Pay Per Click (PPC) and affiliate
spend, both of which have fallen as a percentage of sales. We have increased
our brand investment significantly which has contributed to our spontaneous
brand awareness increasing YOY by about 10%.
Warehousing costs have materially fallen in cash terms and as a percentage of
sales. This is the result of several efficiency savings across our warehousing
operations, as well as the annualisation of property rationalisation, offset
by inflationary increases in wages. Warehousing costs are geared ready for
growth and continue to present an opportunity for further cost savings in
process efficiencies.
Other admin costs, which includes staff and office costs, decreased by £9.4m
to £56.0m (HY23: £65.4m). Savings are a result of the annualisation of
actions taken regarding property rationalisation and rightsizing the headcount
for being a UK business after the closure of Germany, offset by inflation
pressures in the last 12 months. The business continues to focus on
controlling overhead costs.
Operating Profit
Operating profit for the period was £14.7m (HY23: £9.3m loss), for the
reasons explained above.
Alternative Performance Measures
The Group tracks a number of alternative performance measures in managing its
business. These are not defined or specified under the requirements of IFRS
because they exclude amounts that are included in, or include amounts that are
excluded from, the most directly comparable measure calculated and presented
in accordance with IFRS or are calculated using financial measures that are
not calculated in accordance with IFRS. The Group believes that these
alternative performance measures, which are not considered to be a substitute
for or superior to IFRS measures, provide stakeholders with additional helpful
information on the performance of the business. These alternative performance
measures are consistent with how the business performance is planned and
reported within the internal management reporting to the Board. Some of these
alternative performance measures are also used for the purpose of setting
remuneration targets. These alternative performance measures should be viewed
as supplemental to, but not as a substitute for, measures presented in the
consolidated financial statements relating to the Group, which are prepared in
accordance with IFRS. The Group believes that these alternative performance
measures are useful indicators of its performance.
EBITDA
EBITDA is defined by the Group as Profit/(Loss) from continuing activities
before interest, tax, depreciation, amortisation, profit/ (loss) on the
disposal of fixed assets and impairment of assets.
Adjusted EBITDA
Adjusted EBITDA is calculated by adding back or deducting Adjusting items to
EBITDA. Adjusting items are those items that the Group excludes in order to
present a further measure of the Group's performance. Each of these items,
costs or incomes is considered to be significant in nature and/or quantum or
are consistent with items treated as Adjusting in prior periods.
Excluding these items from profit metrics provides readers with helpful
additional information on the performance of the business across periods
because it is consistent with how the business performance is planned by, and
reported to, the Board and the Chief Operating Decision Maker.
The reconciliation of statutory operating profit/ (loss) to Adjusted EBITDA is
as follows:
6 months 6 months % change
£m ended ended
30 September 2023 30 September 2022
Operating profit/ (loss) 14.7 (9.3) 158.4%
Depreciation 11.1 12.5 11.4%
Amortisation 1.2 1.3 9.1%
(Profit)/ Loss on disposal of assets (0.1) 0.7 19.7%
EBITDA 26.9 5.2 418.2%
Adjusting items - 3.6 (100.0%)
Adjusted EBITDA 26.9 8.8 204.9%
Adjusted EBITDA as % of Revenue 5.6% 1.6%
Adjusting items
There were no adjusting items in the six months ended 30 September 2023.
In the six months ended 30 September 2022, following the Group's change of
strategy to focus on the UK business, the Group started a simplification of
its operations which included exiting various loss-making parts of the
business including the trial with Tesco, simplifying the organisational
structure and associated contracts. As a consequence, the Group recognised an
expense of £3.6m relating to the restructuring which, due to its size and
nature, was added back in arriving at Adjusted EBITDA.
Taxation
The tax charge is recognised based on management's best estimate of the
weighted-average annual corporation tax rate expected for the full financial
year multiplied by the pre-tax results of the interim reporting period. The
Group's tax charge for the period is £3.8m (2022: £1.1m credit) as a result
of the expected effective tax rate for the year of 31.1% in entities taxable
in the UK, before prior period adjustments and discrete tax adjustments
relating to the period ended 30 September 2023 only. This results in a
combined effective tax rate for the period ended 30 September 2023 of 28.14%.
Discontinued Operations
Following the closure of the Groups German business in June 2022, the German
operations are now treated as a discontinued activity under IFRS5. The results
and cashflows are therefore shown separately on the face of each of these
condensed primary statements. Further details are included in note 11.
Retained profit and earnings per share
Retained profit for the period, including discontinued operations, was £9.4m
(2022: £18.9m loss).
Basic earnings per share from continuing operations was 1.64p (2022: 2.14p
loss) and diluted earnings per share from continuing operations was 1.59p
(2022: restricted to 2.14p loss).
Basic earnings per share from continuing and discontinued operations was 1.64p
(2022: 3.65p loss) and diluted earnings per share from continuing and
discontinued operations was 1.59p (2022: restricted to 3.65p loss).
The calculations for earnings/ (loss) per share are shown in the table below:
£m 6 months 6 months ended Year
30 September
ended
ended
2022
30 September 31 March
2023 2023
Earnings/ (Loss) attributable to owners of the parent company from continuing 9.4 (11.1) 6.2
operations
Earnings/ (Loss) attributable to owners of the parent company from - (7.9) (8.8)
discontinued operations
Earnings/ (Loss) attributable to owners of the parent company 9.4 (19.0) (2.6)
Number of shares
Basic weighted average number of ordinary shares 576,827,866 521,677,418 548,947,969
Potentially dilutive shares options 16,924,982 12,865,785 15,509,762
Diluted weighted average number of ordinary shares 593,752,848 534,543,203 564,457,731
Earnings/ (loss) per share (in pence) from continuing operations
Basic earnings/ (loss) per share 1.64 (2.14) 1.13
Diluted earnings/ (loss) per share 1.59 (2.14) 1.10
Earnings/ (loss) per share (in pence) from continuing and discontinued
operations
Basic earnings/ (loss) per share 1.64 (3.65) (0.48)
Diluted earnings/ (loss) per share 1.59 (3.65) (0.47)
In the period to 30 September 2022, the diluted loss per share had been
restricted to the basic loss per share to prevent having an anti-dilutive
effect.
Cash resources and cash flow
Net funds, which comprise Cash and cash equivalents less borrowings and owned
asset lease liabilities, were £15.6m (31 March 2023: £3.6m; 30 September
2022: net debt £18.6m).
At 30 September 2023, the Group's total net debt, being net funds less right
of use lease liabilities, was £54.8m (31 March 2023: £76.1m; 30 September
2022: £102.3m).
Cash balances at 30 September 2023 were £22.4m (31 March 2023: £19.1m; 30
September 2022: £42.9m). The cash generation in the period was largely driven
by the improved operating performance which has also enabled the Group to
fully repay its revolving credit facility.
Cash drawdowns on the Group's revolving credit facility, which are classed as
borrowings, were £nil at 30 September 2023 (31 March 2023: £10.0m; 30
September 2022: £55.0m). In the current period, the Group entered into a
mortgage to part fund the acquisition of the site from which its main
Recycling business operates and at 30 September 2023 an amount of £2.2m was
outstanding being the only external borrowing at that date.
Lease liabilities of £75.0m (31 March 2023: £85.3m, 30 September 2022:
£90.2m) relate primarily to right of use assets with the reduction in the
period due to cash repayments.
On 6 April 2023, the Group entered into a new £80m Revolving Credit Facility
which replaced its existing facility. The new facility runs to April 2026. The
total amount utilised against this facility at 30 September 2023 was £3.7m
relating to letters of credit/guarantees.
Working Capital
( ) 30 September 2023 31 March 2023 30 September 2022
£m UK Germany Total UK Germany Total UK Germany Total
Inventories 68.4 - 68.4 73.1 - 73.1 69.9 - 69.9
Trade and other receivables 222.5 - 222.5 230.9 0.2 231.1 236.2 2.3 238.5
Trade and other payables (239.6) (0.1) (239.7) (253.5) (0.8) (254.3) (261.7) (4.5) (266.2)
Net working capital 51.3 (0.1) 51.2 50.5 (0.6) 49.9 44.4 (2.2) 42.2
Change in net working capital 0.8 0.5 1.3 6.1 1.6 7.7 15.4 (12.0) 3.4
At 30 September 2023, UK inventories were £68.4m (31 March 2023: £73.1m) and
UK stock days were 35 days (31 March 2023: 40 days). The reduction is partly
driven by the lower sales volumes in the period albeit this has been balanced
against ensuring we maintain appropriate levels to maintain customer
availability.
UK trade and other receivables (both non-current and current) were £222.5m as
at 30 September 2023 (31 March 2023: £230.9m). The decrease is largely
driven by the slowdown in volumes and hence revenue in our Mobile business and
the subsequent reduction in the related contract asset.
UK trade and other payables were £239.6m at 30 September 2023 (31 March 2023:
£253.5m). UK trade payables days at 30 September 2023 were 59 days (31 March
2023: 58 days). The reduction in retail volumes in the period has resulted in
lower payables. In addition, the year on year decline in new contract
connections in our Mobile business has resulted in a reduction in the amount
of advanced payments from network
Capital expenditure
Cash capex of £4.1m in the first half (30 September 2022: £1.0m) was mainly
related to the acquisition of the previously leased land and buildings at our
Recycling site. This was part funded by a £2.2m commercial mortgage.
John Roberts Mark Higgins
Founder and Chief Executive Officer Chief Financial Officer
CONDENSED CONSOLIDATED INCOME STATEMENT
For the 6 months ended 30 September 2023
£m Note 6 months ended Year
6 months 30 September 2022 ended
ended 31 March
30 September 2023 2023
Revenue 2 481.7 546.3 1,138.5
Cost of sales 3 (368.7) (439.8) (900.3)
Gross profit 113.0 106.5 238.2
Administrative expenses 3 (98.9) (118.0) (226.4)
Other operating income 3 0.6 2.2 0.7
Operating profit/ (loss) 14.7 (9.3) 12.5
Finance income 4 2.0 1.5 2.9
Finance costs 5 (3.5) (3.8) (7.8)
Profit/ (Loss) before tax 13.2 (11.6) 7.6
Taxation (3.8) 0.6 (1.2)
Profit/ (Loss) after tax for the period from continuing operations 9.4 (11.0) 6.4
Loss for the period from discontinued 11 - (7.9) (8.8)
operations
Profit/ (Loss) for the period 9.4 (18.9) (2.4)
Profit/ (Loss) for the period attributable to:
Owners of the parent company 9.4 (19.0) (2.6)
Non-controlling interest - 0.1 0.2
9.4 (18.9) (2.4)
Earnings/ (Loss) per share (pence) from continuing operations
Basic earnings/ (loss) per share 1.64 (2.14) 1.13
Diluted earnings/ (loss) per share 1.59 (2.14) 1.10
Earnings/ (Loss) per share (pence) from continuing and discontinued operations
Basic earnings/ (loss) per share 1.64 (3.65) (0.48)
Diluted earnings/ (loss) per share 1.59 (3.65) (0.47)
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the 6 months ended 30 September 2023
£m Year ended
6 months ended 30 September 2023 6 months ended 30 September 2022 31 March 2023
Profit/ (Loss) for the period 9.4 (18.9) (2.4)
Items that may be subsequently recycled to Income Statement
Exchange differences on translation - (8.3) (6.4)
of foreign operations
Total comprehensive profit/ (loss) for the period 9.4 (27.2) (8.8)
Total comprehensive profit/ (loss) for the period attributable to:
Owners of the Company 9.4 (27.3) (9.0)
Non-controlling interests - 0.1 0.2
9.4 (27.2) (8.8)
Total comprehensive profit/ (loss) attributable to owners of the parent
arising from:
Continuing operations 9.4 (11.1) 6.2
Discontinued operations - (16.2) (15.2)
9.4 (27.3) (9.0)
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
As at 30 September 2023
£m Note 30 September 31 March
30 September 2022 2023
2023
Non-current assets
Goodwill 6 28.2 28.2 28.2
Other intangible assets 8.3 10.8 9.6
Property, plant and equipment 21.7 24.4 20.9
Right of use assets 61.1 73.1 69.4
Trade and other receivables 7 89.5 89.1 93.3
Deferred tax asset 5.9 10.1 8.3
214.7 235.7 229.7
Current assets
Inventories 68.4 69.9 73.1
Trade and other receivables 7 133.0 149.4 137.8
Corporation tax receivable 1.3 1.8 0.6
Cash and cash equivalents 22.4 42.9 19.1
225.1 264.0 230.6
Assets held for sale 11 - 3.9 -
225.1 267.9 230.6
Total assets 439.8 503.6 460.3
Current liabilities
Trade and other payables 8 (236.8) (262.6) (249.5)
Borrowings 9 (0.2) (55.0) (10.0)
Lease liabilities 9 (17.0) (18.8) (17.8)
Provisions (0.5) (2.7) (1.2)
(254.5) (339.1) (278.5)
Net current liabilities (29.4) (71.2) (47.9)
Non-current liabilities
Trade and other payables 8 (2.9) (3.6) (4.8)
Borrowings 9 (2.0) - -
Lease liabilities 9 (58.0) (71.4) (67.5)
Provisions (3.7) (3.1) (3.8)
(66.6) (78.1) (76.1)
Total liabilities (321.0) (417.2) (354.6)
Net assets 118.7 86.4 105.7
Equity attributable to owners of the parent
Share capital 1.4 1.4 1.4
Investment in own shares - - -
Share premium account 108.5 108.2 108.2
Other reserves 70.4 57.5 59.4
Retained losses (61.6) (79.8) (63.3)
Total 118.7 87.3 105.7
Non-controlling interest - (0.9) -
Total equity 118.7 86.4 105.7
CONDENSED CONSOLIDATED STATEMENT OF CHANGE IN EQUITY
At 30 September 2023
Other reserves
Share capital Investment in own shares Share premium account Merger reserve Capital redemption reserve Share-based payment reserve Translation reserve Other reserve Retained losses Total
£m £m £m £m £m £m £m £m £m £m
Balance at 31 March 2023 1.4 - 108.2 59.2 0.5 15.5 (9.4) (6.3) (63.3) 105.7
Effect of change in functional currency (see note 1) - - - - - - 9.4 - (9.4) -
Balance at 1 April 2023 1.4 - 108.2 59.2 0.5 15.5 - (6.3) (72.7) 105.7
Profit for the period - - - - - - - - 9.4 9.4
Issue of share capital - - 0.3 - - - - - - 0.3
(net of expenses)
Share-based payments charge - - - - - 3.3 - - - 3.3
(net of tax)
Movement between reserves - - - - - (1.7) - - 1.7 -
Balance at 30 September 2023 1.4 - 108.5 59.2 0.5 17.1 - (6.3) (61.6) 118.7
At 30 September 2022
Other reserves
Share capital Investment in own shares Share premium account Merger reserve Capital redemption reserve Share-based payment reserve Translation reserve Other reserve Retained losses Total Non-controlling interest Total
£m £m £m £m £m £m £m £m £m £m £m £m
Balance at 31 March 2022 1.2 - 104.4 22.2 0.5 11.8 (3.0) (3.0) (60.7) 73.4 (1.0) 72.4
(Loss) / Profit for the period - - - - - - - - (19.0) (19.0) 0.1 (18.9)
Issue of share capital 0.2 - 3.8 37.0 - - - - (2.0) 39.0 - 39.0
(net of expenses)
Foreign currency loss arising on consolidation - - - - - - (8.3) - - (8.3) - (8.3)
Share-based payments charge (net of tax) - - - - - 2.2 - - - 2.2 - 2.2
Movement between reserves - - - - - (1.9) - - 1.9 - - -
Balance at 30 September 2022 1.4 - 108.2 59.2 0.5 12.1 (11.3) (3.0) (79.8) 87.3 (0.9) 86.4
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For the 6 months ended 30 September 2023
6 months ended 30 6 months ended 30 September 2022 Year ended
September 2023 31 March 2023
£m
Cash flows from operating activities
Profit/ (Loss) for the period in continuing operations 9.4 (11.0) 6.4
Net cash used in operating activities in discontinued operations (0.6) (6.9) (8.8)
Adjustments for:
Depreciation and amortisation 12.3 14.5 29.0
(Profit)/ Loss on disposal of property, plant (0.1) 0.7 0.9
and equipment
Finance income (2.0) (1.5) (2.9)
Finance costs 3.5 3.8 7.8
Taxation charge/ (credit) 3.8 (0.6) 1.2
Share-based payment charge 3.2 2.2 5.3
(Decrease)/ Increase in provisions (0.8) 3.2 2.7
Operating cash flows before movement in working capital 28.7 4.4 41.6
Decrease in inventories 4.7 12.2 9.0
Decrease in trade and other receivables 9.9 9.2 14.7
Decrease in trade and other payables (14.1) (35.3) (43.0)
Net movement in working capital 0.5 (13.9) (19.4)
Taxation (paid)/ received (1.3) 0.7 2.2
Cash generated from/ (used in) operating activities 27.9 (8.8) 24.4
Cash flows from investing activities
Proceeds from the sale of property, plant and - 0.1 0.1
equipment
Acquisition of property, plant and equipment (4.1) (1.0) (2.1)
Acquisition of intangible assets - - (0.1)
Net cash (used in)/ generated by investing - (0.3) 9.8
activities of
discontinued operations
Cash (used in)/ generated from investing activities (4.1) (1.2) 7.7
Cash flows from financing activities
Proceeds from issue of ordinary share capital 0.3 41.1 41.1
Share issue costs - (2.0) (2.0)
Acquisition of non-controlling interest - - (2.5)
Net (repayment of)/ New borrowings (see note 9) (7.8) 10.0 (35.0)
Interest paid on borrowings (1.6) (1.7) (3.5)
Interest paid on lease liabilities (2.0) (2.1) (4.2)
Repayment of lease liabilities (9.4) (8.1) (17.7)
Net cash used in financing activities of - (3.7) (8.6)
discontinued operations
Net cash (used in)/ generated from financing activities (20.5) 33.6 (32.3)
Net increase / (decrease) in cash 3.3 23.4 (0.3)
Exchange loss on cash & cash equivalents - - (0.1)
Cash and cash equivalents at beginning of period 19.1 19.5 19.5
Cash and cash equivalents at end of period 22.4 42.9 19.1
NOTES TO THE FINANCIAL INFORMATION
1. Basis of preparation
The interim financial information was approved by the Board on 21 November
2023. The financial information for the 6 months ended 30 September 2023 has
been reviewed by the Group's external auditor. Their report is included within
this announcement. The financial information for the year ended 31 March 2023
is based on information in the audited financial statements for that period
which are available online at https://www.ao-world.com/investor-centre/
(https://www.ao-world.com/investor-centre/) .
The comparative figures for the year ended 31 March 2023 are an abridged
version of the Group's full financial statements and, together with other
financial information contained in these interim results, do not constitute
statutory financial statements of the Group as defined in section 434 of the
Companies Act 2006. A copy of the statutory accounts for the year ended 31
March 2023 has been delivered to the Registrar of Companies. The auditors have
reported on those accounts and their report was unqualified, did not draw
attention to any matters by way of emphasis and did not contain a statement
under s498(2) or (3) of the Companies Act 2006.
This condensed set of financial statements has been prepared in accordance
with IAS 34 Interim Financial Reporting under UK-adopted international
accounting standards. The annual financial statements of the Group for the
year ending 31 March 2024 will be prepared in accordance with UK-adopted
international accounting standards. As required by the Disclosure Guidance and
Transparency Rules of the Financial Conduct Authority, the condensed set of
financial statements has been prepared applying the accounting policies,
judgements and presentation that were applied in the preparation of the
Company's published consolidated financial statements for the year ended 31
March 2023.
Certain financial data have been rounded. As a result of this rounding, the
totals of data presented in this document may vary slightly from the actual
arithmetic totals of such data.
Discontinued operations
Following the closure of the German operations in the previous year, the
remaining principal liability of AO Deutschland Limited is now a GBP
denominated intercompany balance and therefore from 1 April 2023, the
functional currency of this subsidiary was changed from Euros to GBP. This has
led to previous exchange differences on translation of foreign operations
being recycled to the profit and loss reserve as set out in the condensed
Consolidated Statement of Changes in Equity.
Furthermore, the German operations are now treated as a discontinued activity
under IFRS5 and the results and cashflows are therefore shown separately on
the face of each of these condensed primary statements. Further details are
included in note 11.
Non-controlling interest
In the prior year, on 22 November 2022, the Company acquired the remaining
18.4% of issued share capital in AO Recycling Limited for consideration of
£2.5m. AO Recycling is now a wholly owned subsidiary and subsequently there
are no non-controlling interests to report for the period.
Going concern
Notwithstanding net current liabilities of £29.4m as at 30 September 2023,
the financial statements have been prepared on a going concern basis which the
Directors consider to be appropriate for the following reasons:
The Group meets its day-to-day working capital requirements from its cash
balances and the availability of its £80m revolving credit facility (which
was renewed in April 2023 to now expire in April 2026). At 31 October 2023
total available liquidity amounted to £103.4m.
The Group annual report and accounts for the year ended 31 March 2023 were
signed on 4 July 2023 for which the Directors prepared base and sensitised
cash flow forecasts for the Group which covered the period to 31 March 2025
("the going concern period"). The forecasts indicated that the Group would
remain compliant with its covenants and would have sufficient funds through
its existing cash balances and availability of funds from its revolving credit
facility to meet its liabilities as they fall due for that period. The
forecasts took account of current trading, management's view on future
performance and their assessment of the impact of market uncertainty and
volatility as well as applying sensitivity analysis for severe but plausible
downsides to the base case (full details can be found in Note 3 of the Group's
Annual Report and Accounts for the year ended 31 March 2023).
The Directors have considered whether the going concern conclusion for the
Group accounts signed on 4 July 2023 is still appropriate for the assessment
of going concern for these interim financial statements. The results for the
first half of FY24 demonstrate positive variances against the base case
profitability and liquidity used and whilst the potential downsides are still
considered plausible, the business has not seen any material impact during the
first half of the year. Therefore, given the going concern period extended to
31 March 2025, the Directors are confident that the Group and Company will
continue to have sufficient funds to continue to meet its liabilities as they
fall due for at least 12 months from the date of approval of these interim
financial statements and therefore have prepared the interim financial
statements on a going concern basis.
Critical accounting judgements and key sources of estimation uncertainty
In the application of the Group's accounting policies, the Directors are
required to make judgements, estimates and assumptions about the carrying
amounts of assets and liabilities that are not readily apparent from other
sources. The estimates and associated assumptions are based on historical
experience and other factors that are considered to be relevant and are
reviewed on an ongoing basis.
Actual results could differ from these estimates and any subsequent changes
are accounted for with an effect on income at the time such updated
information becomes available.
Accounting standards require the Directors to disclose those areas of critical
accounting judgement and key sources of estimation uncertainty which carry a
significant risk of causing material adjustment to the carrying value of
assets and liabilities within the next 12 months.
As a result of macro-economic factors in recent years, the Directors consider
that the revenue recognition in respect of commission for product protection
plans and network connections include significant areas of accounting
estimation. The Directors have applied the variable consideration guidance in
IFRS 15 and as a result of revenue restrictions do not believe there is a
significant risk of a material downward adjustment. Revenue has been
restricted to ensure that it is only recognised when it is highly probable and
therefore subsequently, there could be a material reversal of restrictions.
The information below sets out the estimates and judgements used in
recognising revenue in these two areas.
Revenue recognition and recoverability of income from product protection plans
Revenue recognised in respect of commissions receivable over the lifetime of
the plan for the sale of product protection plans is recognised in line with
the principles of IFRS 15, when the Group obtains the right to consideration
as a result of performance of its contractual obligations (acting as an agent
for a third party).
Revenue in any one year therefore represents an estimate of the commission due
on the plans sold, which management estimate reliably based upon a number of
key inputs, including:
· the contractual agreed margins;
· the number of live plans;
· the discount rate;
· the estimated length of the plan;
· the estimated historic rate of attrition; and
· the estimated overall performance of the scheme.
Commission receivable also depends for certain transactions on customer
behaviour after the point of sale. Assumptions are therefore required,
particularly in relation to levels of customer attrition within the contract
period, expected levels of customer spend, and customer behaviour beyond the
initial contract period. Such assumptions are based on extensive historical
evidence, and adjustment to the amount of revenue recognised is made for the
risk of potential changes in customer behaviour, but they are nonetheless
inherently uncertain.
Reliance on historical data assumes that current and future experience will
follow past trends. The Directors believe that the quantity and quality of
historical data available provides an appropriate proxy for current and future
trends. Any information about future market trends, or economic conditions
that we believe suggests historical experience would need to be adjusted, is
taken into account when finalising our assumptions each year. Our experience
over the last decade, which has been a turbulent period for the UK economy as
a whole, is that variations in economic conditions have not had a material
impact on consumer behaviour and, therefore, no adjustment to commissions is
made for future market trends and economic conditions.
In assessing how consistent our observations have been, we compare cash
received in a period versus the forecast expectation for that period as we
believe this is the most appropriate check on revenue recognised. Small
variations in this measure support the assumptions made.
For plans sold prior to 1 December 2016, the commission rates receivable are
based on pre-determined rates. For plans sold after that date, base-assumed
commissions will continue to be earned on pre-determined rates but overall
commissions now include a variable element based on the future overall
performance of the scheme.
Changes in estimates recognised as an increase or decrease to revenue may be
made, where for example, more reliable information is available, and any such
changes are required to be recognised in the income statement. During the
year, management have restricted revenue in relation to improvements to plan
cancellations by £3.5m principally as a result of continued uncertainties in
the wider economic outlook. As with all years, other small refinements have
been made but have had an immaterial impact on the revenue recognised.
The commission receivable balance as at 30 September 2023 was £93.9m (31
March 2023: £93.1m). The rate used to discount the revenue for the FY24
cohort is 5.80% (2023: 5.45%). The weighted average of discount rates used in
the years prior to FY24 was 4.34% (2023: 3.91%).
Revenue recognition and recoverability of income in relation to network
commissions
Revenue in respect of commissions receivable from the Mobile Network Operators
("MNOs") for the brokerage of network contracts is recognised in line with the
principles of IFRS 15, when the Group obtains the right to consideration as a
result of performance of its contractual obligations (acting as an agent for a
third party).
Revenue in any one year therefore represents an estimate of the commission due
on the contracts sold, which management estimates reliably based upon a number
of key inputs, including:
· The contractually agreed revenue share percentage - the percentage of
the consumer's spend (to MNOs) to which the Group is entitled;
· The discount rate using external market data (including risk free
rate and counter party credit risk) 4.52% (2023: 2.83%);
· The length of contract entered into by the consumer (12 - 24 months)
and the resulting estimated consumer average tenure which takes account of
both the default rate during the contract period and the expectations that
some customers will continue beyond the initial contract period and generate
out of contract ("OOC") revenue (c4%).
The commission receivable on mobile phone connections can therefore depend on
customer behaviour after the point of sale. The revenue recognised and
associated receivable in the month of connection is estimated based on all
future cash flows that will be received from the MNO and these are discounted
based on the timing of receipt. This also takes into account the potential
clawback of commission by the MNOs and any additional churn expected as a
result of recent price increases announced and applied by the MNOs, for which
a reduction to revenue is made based on historical experience.
The Directors consider that the quality and quantity of the data available
from the MNOs Is appropriate for making these estimates and, as the contracts
are primarily for 24 months, the period over which the amounts are estimated
is relatively short. As with commissions recognised on the sale of product
protection plans, the Directors compare the cash received to the initial
amount recognised in assessing the appropriateness of the assumptions used.
Changes in estimates recognised as an increase or decrease to revenue may be
made where, for example, more reliable information is available, and any such
changes are required to be recognised in the income statement. During the
year, management have refined the assessed estimations in relation to the
assumed collection of commissions once customers reach out-of-contract periods
based on the performance in the period. As a result, £2.9m of revenue has
been recognised in the period relating to previously restricted revenue.
The commission receivable balance as at 30 September 2023 was £71.2m (31
March 2023: £81.3m). The rate used to discount the current year revenue is
4.52% (2023: 2.83%).
Other areas of estimation uncertainty
Impairment of intangible assets and goodwill
As part of the acquisition of Mobile Phones Direct Limited in 2018, the Group
recognised amounts totalling £16.3m in relation to the valuation of the
intangible assets and £14.7m in relation to residual goodwill. At 30
September 2023 the carrying value amounted to £22.5m.
Goodwill and intangible assets are reviewed for impairment if events or
changes in circumstances indicate that the carrying amount may not be
recoverable. If no event, goodwill is reviewed for impairment on an annual
basis. When a review for impairment is conducted, the recoverable amount is
determined based on the higher of value in use and fair value less costs to
dispose ("FVLCOD"). The value in use method requires the Group to determine
appropriate assumptions (which are sources of estimation uncertainty) in
relation to the cash flow projections over the forecast period, the long-term
growth rate to be applied beyond the initial period and the risk adjusted
pre-tax discount rate used to discount the assumed cash flows to present
value.
Whilst at 30 September 2023 the Directors have concluded that the carrying
value of the intangibles and goodwill is appropriate, significant changes in
assumptions, which could be driven by the end customer behaviour with the
Mobile Network Operators, could give rise to an impairment in the carrying
value.
2. Revenue
The table below shows the Group's revenue by each major business area. All
revenue is accounted for at a point in time as the Group has satisfied its
performance obligations on the sale of its products/services.
Major product/services lines
£m 6 months 6 months Year
ended 30 September 2023 ended 30 September 2022 ended 31
March 2023
Product revenue 370.3 432.5 874.8
Service revenue 30.4 23.3 56.2
Commission revenue 56.7 65.9 156.4
Third-party logistics revenue 13.2 12.9 27.6
Recycling revenue 11.1 11.7 23.6
481.7 546.3 1,138.5
3. Segmental analysis
Previously, the Group had two reportable segments; online retailing of
domestic appliances and ancillary services to customers in the UK, and online
retailing of domestic appliances and ancillary services to customers in
Germany. Following the decision in June 2022 to close the German operations
(which are now treated as discontinued), the UK operation is now the only
reportable segment.
Operating segments are determined by the internal reporting regularly provided
to the Group's Chief Operating Decision Maker. The Chief Operating Decision
Maker, who is responsible for allocating resources and assessing performance
of the operating segments, has been identified as the Executive Directors and
has determined that the UK operations now form three reportable segments after
considering the threshold guidance in IFRS 8, being retail, logistics and
recycling.
However, having consideration for the economic characteristics of each of
these segments including the nature of products and services, the type of
customer and methods used to distribute product, the Chief Operating Decision
Maker has concluded that the majority of the Group's business is retail
related and has determined it is appropriate to aggregate these segments into
one reportable segment.
4. Finance income
£m 6 months ended 30 September 2023 6 months ended 30 September 2022 Year ended 31 March 2023
Unwind of discounting on non-current 2.0 1.5 2.9
contract assets
2.0 1.5 2.9
5. Finance costs
£m 6 months ended 30 September 2023 6 months ended 30 September 2022 Year ended 31 March 2023
Interest on lease liabilities 2.0 2.1 4.2
Interest on borrowings 0.8 1.4 2.3
Other finance costs 0.8 0.3 1.2
3.5 3.8 7.8
6. Goodwill
£m
Carrying value at 30 September 2023 and 30 September 2022 28.2
Goodwill relates to the purchase of Expert Logistics Limited, the purchase by
DRL Holdings Limited (now AO World PLC) of DRL Limited (now AO Retail
Limited), the acquisition of AO Recycling Limited (formerly The Recycling
Group Limited) and the acquisition of Mobile Phones Direct Limited (now AO
Mobile Limited) by AO Limited.
Impairment of goodwill
UK CGU - £13.5m
At 30 September 2023, goodwill acquired through UK business combinations
(excluding Mobile Phones Direct Limited) was allocated to the UK
cash-generating unit ("CGU") which is part of the UK operating segment.
This represents the lowest level within the Group at which goodwill is
monitored for internal management purposes.
The Group performed its annual impairment test as at 31 March 2023. The
recoverable amount of the CGU was determined based on the value in use
calculations. The Group prepared cash flow forecasts derived from the most
recent financial budget and financial plan for three years, and extrapolated
cash flows for the following years, up until year five, based on an estimated
growth rate of 1%. This rate does not exceed the average long term growth rate
for the market. The final year cash flow is used to calculate a terminal
value.
During the six months ended 30 September 2023, there have been no significant
changes in the assumptions or performance of the related businesses which
would indicate an impairment test is required at 30 September 2023.
AO Mobile - £14.7m
At 30 September 2023, the goodwill allocated to the Mobile cash generating
unit ("CGU") was £14.7m. In addition to goodwill, at 30 September 2023 other
intangibles stood at £7.8m.
The Group performed a full annual impairment test as at 31 March 2023 which
showed there was headroom against the carrying value.
During the second quarter of the current period, a significant reduction in
demand for new connections, partly driven by the significant inflationary
increases applied by the networks, was evident and this trend of reduced
demand is expected to continue through to the year end. With the results of
the mobile business partly reliant on volume related targets, competition in
the mobile market for a smaller number of connections has had a material
adverse effect on the results and expected outturn of the mobile business for
the current financial period compared to the forecasts used in the annual
impairment review and as a result management considered this to be a trigger
to perform an updated full impairment review at 30 September 2023.
Consequently, management have assessed the recoverable amount of the CGU using
a value in use model. This has been based on management's Board approved
forecast cashflows for the business up-to FY28 with the final year being the
basis for a perpetuity calculation.
The forecasts are therefore dependent on a number of key assumptions and these
include:
· Revenue growth of 4% based on the amount expected to be applied
by the networks over and above inflation each year and considering the outlook
for addressable markets;
· Total cost inflation and cost savings- between +4% and -2.5%
based on publicly available expectations for inflation, managements estimate
of product price changes based on industry knowledge and reductions in brand
spend beyond year 1; and
· Pre-tax discount rate - 12.6% based on the capital structure of
an equivalent business and reflecting market risk and volatility due to
current macro-economic uncertainty.
The total recoverable amount of the CGU is greater than it's carrying value by
£0.8m in managements base case and therefore no impairment is required.
However, given the minimal amount of headroom at 30 September 2023, reasonably
plausible changes in assumptions could lead to a material impairment in the
future as demonstrated below:
Key assumption Sensitivity applied Headroom/(impairment)
Revenue growth per year to FY28 No growth in revenue with corresponding reduction in purchases applied. (£12.9m)
Cost inflation and savings per year to FY28 Increase of 5% in total costs and reduction of 5% in savings (£4.8m)
Pre-tax discount rate Increase/Decrease of 1% (£4.2m)/ £7.3m
7. Trade and other receivables
£m 30 September 2023 30 September 2022 31 March 2023
Trade receivables 20.2 26.7 21.6
Contract assets 165.1 167.7 174.4
Prepayments and accrued income 37.1 43.5 34.9
Other receivables 0.1 0.6 0.2
222.5 238.5 231.1
The trade and other receivables are classified as:
£m 30 September 30 September 2022 31 March 2023
2023
Non-current assets 89.5 89.1 93.3
Current assets 133.0 149.4 137.8
222.5 238.5 231.1
All of the amounts classified as non-current assets relate to contract assets.
Contract assets
Contract assets represent the expected future commissions receivable in
respect of product protection plans and mobile phone connections. The Group
recognises revenue in relation to these plans and connections when it obtains
the right to consideration as a result of performance of its contractual
obligations (acting as an agent for a third party). Revenue in any one year
therefore represents the estimate of the commission due on the plans sold or
connections made.
The reconciliation of opening and closing balances for contract assets is
shown below:
£m 30 September 30 September 2022 31 March
2023 2023
Balance brought forward 174.4 174.1 174.1
Revenue recognised 51.3 61.2 148.7
Cash received (65.8) (71.2) (154.0)
Revisions to estimates 3.2 2.1 2.7
Unwind of discounting 2.0 1.5 2.9
Balance carried forward 165.1 167.7 174.4
During the period, revenue of £0.3m which had been recognised in periods up
to 31 March 2023 was reversed. This is included in the revisions to estimates
above.
In relation to revenue from network connections, an amount of £3.5m was
recognised in the period which had been restricted at 31 March 2023. This is
included in the revisions to estimates above.
The Group still recognises that there is inherent risk in the amount of
revenue recognised as it is dependent on future customer behaviour which is
outside of the Group's control and therefore at 30 September 2023 amounts of
£3.5m and £1.6m have been constrained in relation to revenue recognised in
relation to product protection plans and network commissions respectively.
Product protection plans
Under our arrangement with Domestic & General ("D&G"), the Group
receives commission in relation to its role as agent for introducing its
customers to D&G and recognises revenue at the point of sale as it has no
future obligations following this introduction. A discounted cash flow
methodology is used to measure the estimated value of the revenue and contract
assets in the month of sale of the relevant plan, by estimating all future
cash flows that will be received from D&G and discounting these based on
the expected timing of receipt. Subsequently, the contract asset is measured
at the present value of the estimated future cash flows. The key inputs into
the model which forms the base case for management's considerations are:
· the contractually agreed margins, which differ for each
individual product covered by the plan as is included in the agreement with
D&G;
· the number of live plans based on information provided by
D&G;
· the discount rate for plans sold in the year using external
market data - 5.80% (2023: 5.45%);
· the estimate of profit share relating to the scheme as a whole
based on information provided by D&G;
· historic rate of customer attrition that uses actual cancellation
data for each month for the previous 8 years to form an estimate of the
cancellation rates to use by month going forward (range of 0% to 9.0% weighted
average cancellation by month); and
· the estimated length of the plan based on historical data plus
external assessments of the potential life of products (5 to 16 years).
The last two inputs are estimated based on extensive historical evidence
obtained from our own records and from D&G. The Group has accumulated
historical empirical data over the last 15 years from c.3.3m plans that have
been sold. Of these, c.1.08m are live. Applying all the information above,
management calculates their initial estimate of commission receivable.
Consideration is then given to other factors outside of the historical data
noted above that could impact the valuation. This primarily considers the
reliance on historical data as this assumes that current and future experience
will follow past trends. There is, therefore, a risk that changes in consumer
behaviour could reduce or increase the total cash flows ultimately realised
over the forecast period. Management makes a regular assessment of the data
and assumptions with a detailed review at half year and full year to ensure
this continues to reflect the best estimate of expected future trends. As set
out in Note 1, the Directors do not believe there is a significant risk of a
downward material adjustment to the revenue recognised in relation to these
plans over the next 12 months. The sensitivity analysis below is disclosed as
we believe it provides useful insight to the users of the financial statements
into the factors taken into account when calculating the revenue to be
recognised.
The table shows the sensitivity of the carrying value of the commission
receivables and revenue to a reasonably possible change in inputs to the
discounted cash flow model over the next 12 months.
Sensitivity Impact on contract asset and revenue
£m
Cancellations increase by 2% (1.9)
Cancellation rate reduces by 2% 2.0
Profit share increases or (decreases) by 10% 1.3 / (1.3)
Cancellations
The number of cancellations and therefore the cancellation rate can fluctuate
based on a number of factors. These include macroeconomic changes e.g.,
unemployment, but will also reflect the change in nature of the plan itself
(insurance plan vs service plan). The impact of reasonable potential changes
is shown in the sensitivities above.
Profit share
The profit share attaching to the overall scheme is dependent on factors such
as the price of the plan, the cost of claims and the administration of the
scheme itself. Given changes in macro-economic conditions, there is an
increased risk that claims cost could increase but also the possibility that
to counter any increase in cost that D&G could further increase the price
per plan. The above sensitivity considers what any reasonable change in either
of these could mean to the overall profit share.
Network commissions
The Group operates under contracts with a number of Mobile Network Operators
("MNOs"). Over the life of these contracts, the service provided by the Group
to each MNO is the procurement of connections to the MNO's networks. The
individual consumer enters into a contract with the MNO for the MNO to supply
the ongoing airtime over that contract period. The Group earns a commission
for the service provided to each MNO. Revenue is recognised at the point the
individual consumer signs a contract and is connected with the MNO.
Consideration from the MNO becomes receivable over the course of the contract
between the MNO and the consumer. The Group has determined that the number and
value of consumers provided to each MNO in any given month represents the
measure of satisfaction of each performance obligation under the contract. A
discounted cash flow methodology is used to measure the estimated value of the
revenue and contract assets in the month of connection, by estimating all
future cash flows that will be received from the MNOs and discounting these
based on the expected timing of receipt. Subsequently, the contract asset is
measured at the present value of the estimated future cash flows.
The key inputs to management's base case model are:
· revenue share percentage, i.e. the percentage of the consumer's
spend (to the MNO) to which the Group is entitled;
· the discount rate using external market data - 4.52% (31 March
2023: 2.83%);
· the length of contract entered into by the consumer (12 - 24
months) and the resulting estimated consumer average tenure that takes account
of both the default rate during the contract period and the expectations that
some customers will continue beyond the initial contract period and generate
out of contract revenue.
The input is estimated based on extensive historical evidence obtained from
the networks, and adjustment is made for the risk of potential changes in
consumer behaviour. Applying all the information above, management calculates
their initial estimate of commission receivable. Consideration is then given
to other factors outside of the historical data noted above which could impact
the valuation. This primarily considers the reliance on historical data as
this assumes that current and future experience will follow past trends.
The risk remains that changes in consumer behaviour could reduce or increase
the total cash flows ultimately realised over the forecast period. Management
make a regular assessment of the data and assumptions with a detailed review
at half year and full year to ensure this continues to reflect the best
estimate of expected future trends and appropriate revisions are made to the
estimates. As set out in Note 1, the Directors do not believe there is a
significant risk of a downward material adjustment to the revenue recognised
in relation to these plans over the next 12 months given the variable revenue
constraints applied albeit there could be a material upward adjustment.
The sensitivity analysis below is disclosed as we believe it provides useful
insight to the users of the financial statements by giving insight into the
factors taken into account when calculating the revenue to be recognised. The
table shows the sensitivity of the carrying value of the commission
receivables and revenue to a reasonably possible change in inputs to the
discounted cash flow model over the next 12 months, having taken account of
the changes in behaviour experienced in the period.
Sensitivity Impact on contract asset and revenue
£m
2% decrease/ (increase) in expected cancellations - in contract 1.9/ (1.9)
Cancellations
The number of cancellations, and therefore the cancellation rate, can
fluctuate based on a number of factors. These include macroeconomic changes
e.g., unemployment, interest rates and inflation. The impact of reasonable
potential changes is shown in the sensitivities.
Prepayments and accrued income
At 30 September 2023, included in prepayments and accrued income is £8.7m (30
September 2022: £12.3m) in relation to volume rebates receivable. The amounts
are largely coterminous and are mainly agreed in the month after recognition.
At 31 October 2023, the balance outstanding was £1.0m (31 October 2022:
£3.5m).
8. Trade and other payables
£m 30 September 2023 30 September 2022 31 March 2023
Trade payables 149.5 172.8 163.4
Accruals 25.7 25.1 19.4
Contract liabilities 32.0 34.4 37.2
Deferred income 16.1 17.3 14.2
Other payables 16.4 16.6 20.1
239.7 266.2 254.3
Contract liabilities includes payments on account from Mobile Network
Operators where there is no right of set off with the contract asset and
cashback liabilities due to the end customer within the mobile business.
The trade and other payables are classified as:
£m 30 September 30 September 2022 31 March 2023
2023
Current liabilities 236.8 262.6 249.5
Long-term liabilities 2.9 3.6 4.8
239.7 266.2 254.3
9. Net funds/ (debt) and movement in financial liabilities
30 September 30 September 31 March
2022
£m 2023 2023
Cash and cash equivalents 22.4 42.9 19.1
Borrowings - Repayable within one year (0.2) (55.0) (10.0)
Borrowings - Repayable after one year (2.0) - -
Finance lease liabilities - (1.8) (1.9) (1.9)
Repayable within one year
Finance lease liabilities - (2.8) (4.6) (3.6)
Repayable after one year
Net funds/ (debt) (excluding leases relating to right of use assets) 15.6 (18.6) 3.6
Right of use asset lease liabilities - (15.2) (16.9) (15.8)
Repayable within one year
Right of use asset lease liabilities - (55.2) (66.8) (63.9)
Repayable after one year
Net debt (54.8) (102.3) (76.1)
Whilst not required by IAS 1 Presentation of Financial Statements, the Group
has elected to disclose its lease liabilities split by those which ownership
transfers to the Group at the end of the lease ("Owned asset lease
liabilities") and, for 31 March 2023 comparatives, are disclosed within the
Property Plant and Equipment table of the Group financial statements, and
those leases which are rental agreements and where ownership does not transfer
to the Group at the end of the lease as Right of use asset lease liabilities
which are disclosed within the Right of use assets table in the Group
financial statements. This is to give additional information that the
Directors feel will be useful to the understanding of the business.
The movement in financial liabilities in the period ending 30 September 2023
was as follows:
£m Borrowings Lease
Liabilities
Balance at 1 April 2023 10.0 85.3
Changes from financing cash flows
New borrowings 2.2 -
Repayment of borrowings (10.0) -
Repayment of lease liabilities - (9.4)
Payment of interest (0.8) (2.0)
Total changes from financing cash flows (8.6) (11.4)
Other changes
New leases - 0.9
Interest expense 0.8 2.0
Reassessment of lease terms - (1.8)
Total other changes 0.8 1.1
Balance at 30 September 2023 2.2 75.0
On 6 April 2023, the Group entered into a new £80m Revolving Credit Facility
which replaced the existing revolving credit facility and expires in April
2026. The total amount drawn at 30 September was £3.7m which relates to
letters of credit/guarantees.
On 14 July, AO Recycling Limited, a wholly owned subsidiary, acquired the land
and building at its Halesfield site for £3.5m. This was partly funded by a
ten year commercial mortgage from HSBC of £2.2m which is shown as New
borrowings in the reconciliation above.
£m Borrowings Lease
Liabilities
Balance at 1 April 2022 45.0 108.6
Changes from financing cash flows
New Borrowings 10.0 -
Repayment of lease liabilities - (8.1)
Capital repayments of lease liabilities in Germany - (7.2)
Payment of interest (1.4) (2.1)
Total changes from financing cash flows 8.6 (17.4)
Other changes
New leases - 3.1
Interest expense 1.4 2.1
Reassessment of lease terms - (7.2)
Foreign exchange differences - 1.0
Total other changes 1.4 (1.0)
Balance at 30 September 2022 55.0 90.2
10. Financial Instruments
As detailed in the Group's most recent annual financial statements, our
principal financial instruments consist of trade and other receivables,
accrued income, cash and cash equivalents, trade and other payables and leases
and borrowings. As indicated in Note 1, there have been no changes to the
accounting policies for financial instruments, from those disclosed in the
Company's Annual Report at 31 March 2023.
There have been no changes to the categorisation or fair value hierarchy
(level three) of our financial instruments. The fair values of cash and cash
equivalents, trade and other receivables, accrued income, and trade and other
payables, leases and borrowings are all deemed to approximate their carrying
values and these can be identified on the face of the Statement of Financial
Position and accompanying notes.
11. Discontinued operations
In June 2022, the Group announced that it had taken the decision to close its
business in Germany. As a consequence, the German operations are treated as a
discontinued activity under IFRS5. The tables below show the results and
cashflows of the German operation for the relevant reporting periods.
Income Statement of discontinued operations
£m 6 months 6 months ended Year
ended 30 September 2022 ended
30 September 2023 31 March
2023
Revenue 0.1 36.4 36.2
Expenses (0.1) (47.4) (47.5)
Loss before tax - (11.0) (11.3)
Taxation credit / (charge) - 0.5 (0.1)
Loss after tax - (10.5) (11.4)
Gain on remeasurement of assets - 2.6 2.6
Loss after tax of discontinued operations - (7.9) (8.8)
Cash flow statement
£m 6 months 6 months ended Year
ended 30 September 2022 ended
30 September 2023 31 March
2023
Net cash flows from operating activities (0.6) (6.9) (8.8)
Net cash flows from investing activities - (0.3) 9.8
Net cash flows from financing activities - (3.7) (8.6)
12. Principal risks and uncertainties
There are a number of potential risks and uncertainties which could have a
material impact on the Group's performance over the remaining six months of
the financial year and could cause actual results to differ materially from
expected or historical results. The Directors do not consider that the
principal risks and uncertainties have changed materially since the
publication of the Annual Report for the year ended 31 March 2023.
The principal risks as set out in the Annual Report are summarised below and
further information on these together with information as to how the Group
seeks to mitigate these risks is set out on pages 41-44 inclusive of the
Annual Report and Accounts 2023 which can be found at www.ao-world.com
(http://www.ao-world.com) :
· Risks relating to our culture and people.
· Risk relating to IT systems resilience, cyber security and
agility.
· Risks relating to compliance failures or to changes in laws and
regulations, in particular Data protection and privacy legislation, the basis
upon which the Group offers and sells product protection plans and driver
employment status.
· Risks of business interruption.
· Risks relating to the UK electricals market encompassing a
challenging macro-economic environment and competitive conditions.
· Risks relating to our key commercial relationships and supply
chain.
· Risks relating to our funding and liquidity.
· Risks in relation to significant accounting matters including
revenue recognition and contract asset recoverability in relation to product
protection plans, revenue recognition and contract asset recoverability in
relation to network commissions and the carrying value of goodwill and
intangible assets arising on the acquisition of AO Mobile Ltd .
· Emerging risks in relation to extended producer responsibilities
and the Governments Resources and Waste Strategy together with their link to
climate change, and the emerging opportunities/risks relating to Artificial
Intelligence.
Responsibility statement
Responsibility statement of the directors in respect of the half-yearly
financial report
We confirm that to the best of our knowledge:
· The condensed set of financial statements has been prepared in
accordance with IAS 34 Interim Financial Reporting as adopted for use in the
UK;
· The interim management report includes a fair review of the
information required by:
(a)DTR 4.2.7R of the Disclosure Guidance and Transparency Rules, being an
indication of important events that have occurred during the first six months
of the financial year and their impact on the condensed set of financial
statements; and a description of the principal risks and uncertainties for the
remaining six months of the year; and
(b)DTR 4.2.8R of the Disclosure Guidance and Transparency Rules, being related
party transactions that have taken place in the first six months of the
current financial year and that have materially affected the financial
position or performance of the entity during that period; and any changes in
the related party transactions described in the last annual report that could
do so.
On behalf of the Board
John Roberts Mark Higgins
CEO CFO
21 November 2023 21 November 2023
INDEPENDENT REVIEW REPORT TO AO WORLD PLC
Conclusion
We have been engaged by AO World Plc ("the Company") to review the condensed
set of financial statements in the half-yearly financial report for the six
months ended 30 September 2023 which comprises Condensed Consolidated Income
Statement, Condensed Consolidated Statement of Comprehensive Income, Condensed
Consolidated Statement of Financial Position, Condensed Consolidated Statement
of Changes in Equity, Condensed Consolidated Statement of Cash Flows and the
related explanatory notes.
Based on our review, nothing has come to our attention that causes us to
believe that the condensed set of financial statements in the half-yearly
financial report for the six months ended 30 September 2023 is not prepared,
in all material respects, in accordance with IAS 34 Interim Financial
Reporting as adopted for use in the UK and the Disclosure Guidance and
Transparency Rules ("the DTR") of the UK's Financial Conduct Authority ("the
UK FCA").
Basis for conclusion
We conducted our review in accordance with International Standard on Review
Engagements (UK) 2410 Review of Interim Financial Information Performed by the
Independent Auditor of the Entity ("ISRE (UK) 2410") issued for use in the
UK. A review of interim financial information consists of making enquiries,
primarily of persons responsible for financial and accounting matters, and
applying analytical and other review procedures. We read the other
information contained in the half-yearly financial report and consider whether
it contains any apparent misstatements or material inconsistencies with the
information in the condensed set of financial statements.
A review is substantially less in scope than an audit conducted in accordance
with International Standards on Auditing (UK) and consequently does not enable
us to obtain assurance that we would become aware of all significant matters
that might be identified in an audit. Accordingly, we do not express an
audit opinion.
Conclusions relating to going concern
Based on our review procedures, which are less extensive than those performed
in an audit as described in the Basis for conclusion section of this report,
nothing has come to our attention that causes us to believe that the directors
have inappropriately adopted the going concern basis of accounting, or that
the directors have identified material uncertainties relating to going concern
that have not been appropriately disclosed.
This conclusion is based on the review procedures performed in accordance with
ISRE (UK) 2410. However, future events or conditions may cause the Group to
cease to continue as a going concern, and the above conclusions are not a
guarantee that the Group will continue in operation.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and has been
approved by, the directors. The directors are responsible for preparing the
half-yearly financial report in accordance with the DTR of the UK FCA.
As disclosed in note 1, the annual financial statements of the Group are
prepared in accordance with UK-adopted international accounting standards.
The directors are responsible for preparing the condensed set of financial
statements included in the half-yearly financial report in accordance with IAS
34 as adopted for use in the UK.
In preparing the condensed set of financial statements, the directors are
responsible for assessing the Group's ability to continue as a going concern,
disclosing, as applicable, matters related to going concern and using the
going concern basis of accounting unless the directors either intend to
liquidate the Group or to cease operations, or have no realistic alternative
but to do so.
Our responsibility
Our responsibility is to express to the Company a conclusion on the condensed
set of financial statements in the half-yearly financial report based on our
review. Our conclusion, including our conclusions relating to going concern,
are based on procedures that are less extensive than audit procedures, as
described in the Basis for conclusion section of this report.
The purpose of our review work and to whom we owe our responsibilities
This report is made solely to the Company in accordance with the terms of our
engagement to assist the Company in meeting the requirements of the DTR of the
UK FCA. Our review has been undertaken so that we might state to the Company
those matters we are required to state to it in this report and for no other
purpose. To the fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the Company for our review work, for this
report, or for the conclusions we have reached.
David Neale
For and on behalf of KPMG LLP
Chartered Accountants
15 Canada Square
London
E14 5GL
21 November 2023
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